Outsourced clinical trial expenditure is not eligible for weighted Research and Development deduction

Recently, the Mumbai bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of Concept Pharmaceuticals Ltd. Vs. ACIT (ITA No. 1739/M/2009, 1034/M/2009) (Judgement Date: 19 November 2010, Assessment Year 2005- 06) held that outsourced clinical trial expenditure is not eligible for weighted Research and Development deduction under Section 35(2AB) of the Income-tax Act, 1961 (the Act). The Tribunal held that the expenditure on clinical trial, though the same is an integral part of scientific research, will be eligible for weighted deduction only if the expenditure is incurred on an in-house Research and Development facility.

Facts of the case

• The taxpayer is engaged in the business of manufacturing and trading of medicines, pharmaceutical formulations, bulk drug etc. for which it had set up an in-house Research and Development facility.

• For AY 2005-06, the taxpayer claimed weighted deduction of INR 36 million on scientific research under Section 35(2AB) of the Act. The claim included an expenditure of INR 1.5 million incurred on clinical trials which were conducted by external agencies since the taxpayer did not have the required facility within its Research and Development centre.

• The Assessing Officer (AO) observed that Section 35(2AB) of the Act was concerned only about in-house Research and Development facility. Accordingly, the AO disallowed the claim of INR 1.5 million on account of expenditure incurred outside the taxpayer’s Research and Development facility.

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